Disorder by any other name

The world is becoming a more complex place in which to write reinsurance, says Liberty Mutual Re president Dieter Winkel.

There’s a motorway 10km from where I live in Germany. Right now, it’s closed – blocked as a result of the recent dramatic flooding that’s had a profound effect on the region and the German (re)insurance industry as a whole. You may well have seen it on television or read about it in the media.

It’s not just Germany that is suffering from weather-related woes. Flooding has led to cumulative losses in Belgium and the Netherlands. These will impact the local market, burning through reinsurance programs and contributing another loss towards the aggregate retro market. During August, we also saw apocalyptic images of Greek wildfires, images chilling enough to send actuaries running for their cat models.

I have never experienced so many unmodelled losses occurring as in recent years, the pandemic being a prime example. Partly it’s a result of climate change – the Earth’s infinitely complex weather systems being distorted by human activity. But it’s more than that. The shape of the reinsurance industry is being affected by both systemic and structural forces. What worked once may not work now. What generated a profit 20 years ago may no longer have the same outcome. As our world grows ever more intricate, the degree of unpredictability increases.

As an example, consider the increasing sophistication of the modern car. Fifty years ago, a car was purely mechanical; today, cars contain both mechanical and technological components as well as the software that manages their many functions. This is what engineers call a ‘complex system’. We’ve always had them on our planet – natural complex systems such as climate or the human brain. But now we’re adding our own: the internet, software, global supply chains, integrated transport systems, intensive agriculture.

The challenge with complex systems is not simply that they have more potential points of failure, it’s the question of how to respond to a failure. Fixing a simple machine is relatively straightforward; fixing a complex system containing multiple co-dependencies and relationships is not.

Diversification is the traditional defence against unpredictability. That’s why Liberty Mutual Re segments its book by both geography and line of business. We think not only in terms of North America, Europe and the rest of the world, but also property, specialty and casualty. But today, diversification can only be one component in a more comprehensive response from reinsurers. The ability to take the long-term view has never been more important – to see beyond the confusion of the moment. And the need to find, recruit and retain talent has never been as critical as it is now.

As difficult as 2020 was for all of us it also held many positives for Liberty Mutual Re. We grew our business and performed better than the market average. Along with the market we faced many challenges such as social inflation, labour inflation, increased construction costs and growing cyber risks, but our strategy has seen off their worse effects.

These challenges facing our market are not greater than they were 10 or 20 years ago, but they are different. We’ve swapped asbestos for social inflation, Piper Alpha for Deepwater Horizon, unknown for unmodelled. Losses are increasing in both size and frequency. The pace of business process has accelerated. But the fundamentals are the same.

“It’s not you – the world is becoming more complex.” So said the Harvard Business Review 10 years ago – and nothing since has happened to change that trend. For reinsurers, that growing complexity presents a challenge. However, I’m confident that innovation, rigorous analysis and a willingness to confront change will always overcome. I’m sure we can rise to the challenge again.

You can also view this article in the first weekly edition of #ReinsuranceMonth, which was published on 1 September by The Insurer and is available to download for free at theinsurer.com/reinsurance-month/weekly-editions.